"He who has compassion on them will guide them and lead them beside springs of water." Isaiah 49:10

Sunday, October 5, 2008

So Whose Fault is the Banking Collapse?

By Fidel "Butch" Montoya

Like most other folks, I have been terribly concerned and confused by the Wall Street mess and the bailout by the American taxpayer. Looking at the issue simply as a selfish one, and asking the question, what does the bailout do for me and what do I get out of it?

I have read the news articles about the back door meetings with members of Congress and the Bush Administration Treasury officials. At some points in the meeting, it has been reported that you could hear a pin drop as the shocked and frightened members of Congress heard of the alternatives if they could not saddle the tax bill on the tax payer.

There was talk of a global financial meltdown and of a great depression for our country. Treasury officials were worried about more bank failures, perhaps even causing a run on the banks as panicked consumers looked to get their money out of failing banks.

Perhaps all of the scenarios did not look good at that point, but what concerns me the most is how we allowed our banking and investment institutions to get to this point. It does not make sense that our country would allow banking executives to play so loose with our country's financial and banking industry? How could this happen?

Now we are talking about a more than $750 Billion dollar bailout, guaranteed by American taxpayers, and this is supposedly only the beginning of the "investment the American taxpayer must make in our economy."

Some financial experts say there are plenty of suspects as to who is responsible for the collapse of several financial icons and bankruptcies of American companies we all thought represented integrity and honor among financial institutions.

Imagine the horror as thousands, hundred of thousands employees saw their companies, collapse and basically overnight disappear from the Wall Street scene. There was video of employees walking out of tower offices, carrying a box of belongings. The end of their careers, at least with some of these companies.

While there was enough human drama and stories that could break your heart as employees felt the world had just ended, the ugly question remained, who was responsible for this collapse? Who would put our country in such peril if we are to believe all the end of the world scenarios outlined for Congress members?

It seemed so easy to just assume that the taxpayer would accept responsibility for the failure, man made failures by banking institutions.

After reading time and time again, how top corporate executives often walked away from their failing companies with "golden parachutes" worth millions of dollars, it just didn't seem right when it happened. While rank and file employees faced financial peril, there was no one to look out for their interests.

And for me that is the central point of concern. While the bigwigs lived high in the penthouses of New York City, ate at all the fancy restaurants, and lived the lives of Kings and Queens, the rest of us have had to eat our losses and pay higher taxes with no one willing to bail us out.

Just once it would have been nice to see a bank tell a customer who was in mortgage default, "Don't worry, we will let you pass this month, and we are considering writing off your bad loan."

Millions of Americans are losing their homes due to mortgage defaults, thousands are losing their jobs, GM, Ford, and other car manufacturers are close to bankruptcy or in bankruptcy, airlines flying with so much red ink, it is frightening, and yet, I don't see any efforts being made to help individual American taxpayers who need help the most right now.

For someone who is losing their job, their home, their future, it could very well feel like a depression, a personal financial meltdown, and no help in sight.

I hope the politicians come clean on this bailout....a word the government does not want us to use, because it creates the impression we are bailing out private capitalist enterprises, and since when do we owe the business fat cats our support?

Perhaps I don't understand all the repercussions and the fate that awaits our economy, but where was the President, the Congress, the Treasury Department, and the candidates for federal offices? Why are we paying our elected officials if they seem to not know how to protect our country's financial resources and future?

Meanwhile, I am waiting for my mortgage banker to call me and say, "we are writing off your loan. Have a happy day, and by the way, if you need another loan or credit card, don't be afraid, just ask."

2 comments:

This New York Times Article dated 1999 might give some insight into whose fault this is

Fannie Mae Eases Credit To Aid Mortgage LendingBy STEVEN A. HOLMESPublished: September 30, 1999In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

The NYT article is far from out of date. While this crisis has been in the making since the 1920's, the eventual end was spread along by policies of "the ownership society". A series of policies enacted by the Bush administration such as "the American Dream act" allowed even more risky loans to be made while reducing risk to the actual lenders.

"President Bush issued America's Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities. The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade."

In the 90's when the economy was booming and the unemployment levels had dropped to an all time low, there were a lot of people who were low risk for loans. encouragement of these loans were because the economy was doing well. They were not being used in hopes of encouraging economic growth.

Enter the house flipper, mortgage broker, sub-prime loans lender, and the high risk borrower of the new millennium. As industrial outsourcing and growth of trade deficits became the norm, unemployment started to rise. So did the cost of housing. However, with the army of mortgage brokers and real estate agents wanting to continue their employment, they were forced to loan to people who wouldn't have otherwise made the cut.

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